ARES CAPITAL CORPORATION Q3 2026 EARNINGS - ARES CAPITAL CORP

Explicit Guidance:

• Dividend: Confirmed Q4 2026 dividend of $0.48 per share, payable December 29, 2026, to shareholders of record as of December 15, 2026.
• Earnings Sensitivity: Every 100 basis point increase in base rates is expected to generate approximately $0.02 per share of earnings tailwind per quarter; benefits from recent rate increases are anticipated to begin materializing in Q4 2026 (one-quarter lag due to contractual resets).
• Taxable Spillover: Carried forward $983 million ($1.37 per share) of taxable income available for distribution in 2026.
• Acquisition Accretion: The acquisition of MidCap Financial (MFIC) is expected to be "modestly accretive" to Core Earnings Per Share (EPS) immediately upon closing, driven by the purchase discount and higher asset yields.
• Leverage Target: Maintaining a target net leverage ratio of 0.9x to 1.25x debt-to-equity; current net leverage of 1.06x and pro-forma net leverage of 1.10x fall within this range.
• Cost of Capital: Expecting continued access to capital with lower funding costs; no additional debt capital is anticipated to be needed to fund the MFIC acquisition due to existing liquidity ($7 billion) and an up-sized $750 million Wells Fargo facility commitment.

Business-Segment Outlook:

• Portfolio Composition: Pro forma portfolio size expected to exceed 800 companies and 600 sponsors (increasing from current ~636 companies and ~600 sponsors).
• Sector Diversification: MFIC portfolio introduces less software exposure and higher healthcare allocation compared to ARCC's current mix; average EBITDA size of MFIC assets (~$50–$55 million) complements ARCC's upper middle-market focus.
• Investment Activity: Originations pace is expected to remain measured in the near term due to market volatility, though investment pipeline remains robust (over $1 trillion reviewed in the last 12 months).
• Investment Backlog: Backlog stands at approximately $2.5 billion, with $1.1 billion of commitments closed in Q4 2026, indicating strong near-term investment capacity.
• Credit Quality: Maintaining discipline with weighted average borrower interest coverage at 2.0x and loan-to-value (LTV) at 47% (significantly below 10-year average); non-accruals expected to remain stable around 2.4% of cost or 1.4% of fair value.
• Maturity Profile: No unsecured note maturities expected for the remainder of 2026; $1.4 billion maturing in 2027; maturity wall in 2028–2029 projected at ~10–13% of portfolio, deemed typical and manageable.

Market and Competitive Outlook:

• Direct Lending Environment: Market pricing, terms, and lender protections in the U.S. direct lending market remain stable at historically favorable levels; spread widening of 50 basis points observed in Q3.
• Deal Volume vs. Quality: While origination volume in Q3/Q4 was slower due to extended timelines and geopolitical uncertainty, deal review activity is up ~25% year-over-year, suggesting a pipeline recovery.
• Competitive Positioning: ARCC expects "certainty of close" to be the primary differentiator as borrowers and sponsors prioritize lenders with strong balance sheets in a volatile environment.
• Market Dynamics: Anticipated "recovery and investing activity" as transaction timelines normalize; market conditions expected to support earnings growth through floating rate resets.

Macro / Industry Outlook:

• Interest Rates: View higher base rates as a constructive tailwind for earnings, with portfolio coverage (2.0x) providing a cushion for further rate hikes; management does not anticipate credit issues at a 1% (100 bps) rate increase scenario.
• Economic Environment: Macroeconomic shifts and geopolitical developments have created uncertainty, elongating M&A processes and reducing visibility, but underlying borrower cash flow growth remains healthy.
• Inflation & Trade: Acknowledged as drivers of market volatility that reduced deal activity, but management remains confident in the ability to navigate these cross-currents.
• Regulatory/Structural: No specific changes to regulatory or tax framework anticipated that would alter the current dividend strategy or capital structure management.

Strategic Initiatives:

• Acquisition of MFIC: Agreement to acquire MidCap Financial Investment Corporation (formerly Apollo Investment Corporation) to add scale and diversification; transaction expected to close in 5–6 months (early 2027).
• Platform Expansion: The deal adds over 200 incumbent positions and expands the sponsor network, creating opportunities for "incumbency" value and follow-on investments.
• M&A Consolidation: Continuation of a 22-year strategy of using market dislocation to consolidate; ARCC aims to have acquired the three largest BDCs from the industry's IPO era (Allied, American, MidCap).
• Capital Structure Optimization: Securing a $750 million upsize to Wells Fargo facility and utilizing commercial paper ($200–$300 million average outstanding in Q3) to lower funding costs; potential for IAM (Ivy Hill) to acquire performing portions of the MFIC loan book.
• Operational Capacity: Anticipated slight increase in headcount for investment managers to support the expanded portfolio of 800+ companies.

Risks and Headwinds to Outlook:

• Execution Risk: The acquisition discount is concentrated in assets with "greater uncertainty of business outcomes" and wider bid-ask spreads; actual performance may differ if these specific positions deteriorate further.
• Macroeconomic Volatility: Continued geopolitical instability, inflation, and trade issues could further delay transaction timelines and origination volume.
• Interest Rate Sensitivity: While a tailwind now, sustained or higher-than-expected rate hikes could eventually stress borrowers at the "tails" of the portfolio.
• Market Liquidity: Dependency on continued market access for debt refinancing and asset exits; potential for market dislocation to impact pricing and timing of future transactions.
• Integration: Management of ~200 new portfolio companies and integration of differing credit policies (e.g., non-accrual definitions) without significant disruption to credit metrics.

Management Tone on the Future:

• Confidence Level: High confidence in current dividend stability and the strategic value of the MFIC acquisition, described as "additive rather than transformative."
• Strategic Outlook: Optimistic about the "recovery and investing activity" as borrowers value certainty; views slower origination pace as a matter of timing rather than lack of opportunity.
• Discipline: Reaffirmed commitment to underwriting standards and selectivity despite the pressure to deploy capital in a competitive market.
• Hedges: Caveats included regarding the timing of earnings benefits from rate hikes (quarterly lag) and the uncertainty of future discount realization on acquired assets until the transaction closes.

Miscellaneous:

• Leverage Adjustment: Pro forma leverage for the MFIC deal is 1.10x (including unsettled trade payables), utilizing existing liquidity to avoid new debt issuance for the acquisition.
• Asset Allocation: 60% of Q3 commitments were to existing portfolio companies, reinforcing the strategy of deepening incumbent relationships.
• Software Portfolio: Strong performance in software sector (organic EBITDA growth in line with average) with minimal non-accruals (one small loan), supported by low LTVs (~40%).
• Dividend History: 69 consecutive quarters of stable or increasing quarterly dividends; current dividend reflects underlying earnings power and spillover income flexibility.